India’s Investment Incentives: Opportunities in 2023
Like most developing countries, India’s investment incentives mainly focus on guiding investment flows to key development industries, stimulating economically backward regions, and promoting export growth. The federal government of India currently offers a number of incentive schemes, including corporate tax and non-tax incentives for the establishment of new industries; there are also special schemes for specific industries such as power, ports, highways, electronics and software; incentives. In addition, incentives are provided for businesses engaged in export activities or located in export processing zones. Development banks run by central and state governments provide medium- and long-term loans and may even take stakes in new projects. Some states also offer additional incentives.
Every company incorporated in India (excluding branches and liaison offices) can apply for the General Incentive. These incentives apply regardless of the degree of foreign ownership of common stock. The application process for tax benefits does not require special procedures. Instead, all eligible deductions are claimed when filing the tax return and must be accompanied by a certificate from the relevant agency as proof of eligibility.
The Indian government’s Atmanirbhar Bharat and Make in India initiatives, launched in 2020 and 2014 respectively, aim to transform the country into a manufacturing powerhouse. This transition is expected to be achieved by increasing local production and attracting foreign investment by 2025. The main tool to achieve these goals is the Production Linkage Incentive Scheme (PLI) launched during the peak of the epidemic in 2020 with a total funding of Rs 1.97 trillion over five years.
PLI plans to provide financial support for domestic products in 16 industries when turnover increases, and increase solar modules and semiconductors in 2022. As of the end of October 2022, the application deadlines for industries such as auto parts, drones and drone components, advanced chemical batteries, metals and mining, telecommunications, textiles and clothing have closed. However, applications for PLI incentives are still being accepted for industries such as large-scale electronics manufacturing and IT hardware, medical equipment, pharmaceuticals, renewable energy, and white goods such as air conditioners and LED lights.
The PLI incentive is intended to complement the temporary reduction in corporate tax rates introduced in 2019 for newly established manufacturing businesses. The measure applies as long as the companies start operating before March 31, 2024. At the same time, the federal government of India has also lifted restrictions on foreign direct investment in many industries, and implemented it in parallel with the “Make in India” plan.
Beginning in early 2020, the central government began rolling out a series of measures to protect businesses from the adverse economic impact of the coronavirus pandemic. The measures include emergency working capital for small businesses, expanded credit guarantees and deferment of loan and tax payments. Still, most of these pandemic-related relief measures expire at the end of October 2022.
For a long time, the Indian federal government has usually provided additional incentives for export-oriented industries. However, with the promotion of the Atmanirbhar Bharat policy, India has also begun to provide incentives for import substitution industries. The key points include the following:
The Indian construction industry has experienced significant growth, driven by investment-related tax breaks and infrastructure development projects. These tax breaks apply to projects such as airports, seaports, inland ports, waterways, industrial parks, natural gas distribution networks, temperature-controlled supply chains, affordable housing and hospitals. In addition, the International Financial Services Center (IFSC) Authorization Act 2019 encourages the establishment of offshore financial centers such as Kupang International Fintech City to attract domestic and foreign banks.
Housing, especially affordable housing, is considered a “key industry” by the Indian government and is eligible for various incentives. Home loan borrowers can get tax breaks on interest and principal repayments, while housing companies can claim tax exemptions on provisions made on long-term loan profits. Indemnificatory housing projects that meet certain conditions can enjoy 100% profit tax exemption, and this policy also applies to eligible indemnificatory rental housing projects.
The shipping and ports industry benefits from automatic investment approval for the acquisition of ships and relaxed cabotage laws. The Indian government is also working on the Sagarmala project, which aims to develop and modernize ports, coastal economic zones and related infrastructure through 574 projects with an investment of INR 6.01 trillion. Plans are underway to build six new major ports and convert existing major ports into for-profit companies, with ships and inland vessels eligible for accelerated depreciation of 20%.
India’s energy industry is supported by tax incentives and policy reforms. Petroleum explorers are entitled to a 100% tax break on the amount deposited with the State Bank of India, while the Hydrocarbon Exploration and Licensing Policy (HELP), which replaces the previous New Exploration License Policy, allows for a single license for all hydrocarbons and More pricing and marketing freedom. The Open Area Licensing Policy (OALP) allows companies to identify blocks of their choice for auction, facilitating exploration and development.
The electricity generation and distribution industry in India is eligible for a ten-year tax holiday and is encouraged to undertake substantial renovation and modernization of existing transmission and distribution lines. To encourage foreign investment in the power sector, the government has set ambitious targets for renewable energy capacity expansion and provided incentives such as capital and interest subsidies, viability gap financing, preferential financing and preferential tariffs.
Companies in India’s scientific research and development industry can enjoy 100% income tax relief on internal R&D capital and income expenditures, while knowledge-based industries enjoy tax-free imports of R&D equipment. The telecom industry has also experienced growth due to the removal of tariffs on certain tax items and the introduction of the Production Linkage Incentive (PLI) scheme for mobile phones and certain electronic components.
Manufacturing in India is supported by a production-linked incentive scheme announced in September 2021. The program provides financial incentives to automotive original equipment manufacturers (OEMs) producing electric and hydrogen fuel cell vehicles, as well as auto parts manufacturers using advanced vehicle technologies. Non-automotive investment companies or their group companies are also eligible for the incentive, and the government expects selected applicants to make substantial investments over the next five years.
India’s healthcare and pharmaceutical industry is a global leader in production and exports, but the country relies heavily on imports for medical devices and raw materials. To address this, the government has launched programs to boost domestic production of APIs and medical devices, develop drug and medical device parks, and provide production-linked incentives for pharmaceuticals covering a wide range of drugs, intermediates, and ingredients. These efforts are aimed at reducing dependence on imports and strengthening the domestic healthcare and pharmaceutical industries.
The “Northeast Industrial Development Plan 2017” is aimed at the eight northeastern states of India and will be effective from April 2017 to March 2022, and applies to all new industrial manufacturing and service units. The scheme provides a capital allowance of 30% capped at Rs 5 crore for plant and machinery investments. In addition, it offers several transport and employment-related subsidies. The benefits also include repayment of GST and income tax paid by the central government, 3% interest rate subsidy on working capital loans and 100% repayment of factory and machinery insurance premiums, all for a five-year period. However, the aggregate benefits of all these incentives were capped at Rs 200 crore per unit, and were not renewed upon termination of the scheme.
Local ministries are usually the most reliable source for information on available incentive programs. Also, all states have offices in New Delhi for easy access. State governments actively compete with each other to attract foreign investment and are often willing to create incentives for specific projects. This is especially true for large-scale, job-creating projects. States such as Telangana, Gujarat and Tamil Nadu have been particularly active in this regard.
Units set up in special economic zones and government-funded science and technology parks enjoy tax and other preferential policies. Certain parks are dedicated to specific industries, such as Electronic City in Karnataka and various electronic hardware tech parks spread across the country. Many state governments have established industrial development organizations to provide designated sites, water and power facilities for industrial areas. State tax rebates and other special benefits are sometimes offered.
The Indian government’s plan to create “100 smart cities” envisages developing a sustainable environment through advanced infrastructure. There were four rounds of city selection in this event, and 100 cities were finally selected. As of October 2022, dozens of projects are already under construction in these cities.
While companies that choose to do business in these smart cities may not receive financial incentives, they can still benefit from improved infrastructure and affordable land and housing. Essentially, this creates an environment conducive to growth and development for both established and emerging businesses.
Export Orientation Incentives and Parks
India’s foreign trade policy for 2015-20 and the subsequent mid-term review in 2017 retained and expanded the export promotion benefits and policies of the previous five-year plan. Still, it combined several programs with other existing initiatives into one major incentive program for exports of goods and services. Instead of introducing a new policy for 2020-25, the government has opted to extend the existing policy until March 2022 and then to March 2023. At the end of March 2023, the government also issued a new policy, which will continue until 2028.
In the meantime, the government is taking steps to aid exporters in an effort to stimulate the stalled economy and boost sluggish exports. These include improved credit flow, lower interest rates, expanded insurance coverage, affordable testing facilities, automatic indirect tax assessments, and exporter refunds. Other measures include a digital platform for export clearance and reduced turnaround times at airports and ports. Companies interested in export tax incentives should apply to the Ministry of Commerce and Industry.
One of the current programs is the Relief of Duty or Tax on Exported Products (RoDTEP). The Ministry of Commerce and Industry launched the scheme in August 2021, with retroactive effect from 1 January 2021. Initially scheduled to launch in 2020, the scheme aims to refund exporters for taxes and duties incurred that would not be refunded under any other scheme. These include local taxes, electricity taxes and export input taxes.
In August 2021, the government published a list of 8,555 tariff lines with reimbursement rates ranging from 0.5-4.3% of the FOB value of exports, subject to unit value caps. Reimbursements are issued in the form of freely transferable electronic “vouchers”, which are incentives that can be used to pay basic tariffs. RoDTEP focuses on labor-intensive industries and extends to traders and exporters through e-commerce platforms. It replaces the earlier Merchandise Exports to India Scheme (MEIS), under which certain goods exported to certain markets were eligible for duty credits.
The US has challenged several of India’s export schemes, including the World Trade Organization’s (WTO) MEIS, which accuses India of illegally subsidizing exporters. In response to the allegations, the Indian government has pledged to replace some existing schemes with new schemes that comply with WTO rules. However, many exporters have expressed dissatisfaction with RoDTEP because its tax rate is lower than MEIS and it ignores certain industries covered by MEIS such as steel, chemicals and pharmaceuticals.
Another scheme is the Export of Indian Services Scheme (SEIS). Individual service providers earning at least US$10,000 in foreign exchange and other service providers earning at least US$15,000 in foreign exchange are eligible for a duty credit of 3% or 5% of net foreign exchange earnings (depending on the service). The scheme is for service providers in India, which means foreign companies offering services in India are eligible. In the mid-term review of foreign trade policies in 2017, the tax rates of about nine service industries including law, accounting, construction, engineering, hotels, and hospitals were increased by 2%.
Furthermore, the Export Promotion Capital Goods (EPCG) scheme allows companies to import capital goods, consumables and spare parts at zero duty in exchange for a fixed export obligation of six times the duty savings under the scheme, within six years. Deemed exports, shipments under other incentive schemes, royalties paid in freely convertible currencies, foreign exchange received for research and development services, and payments in rupees for port handling services are included in the export obligation.
The 2017 mid-term review of India’s foreign trade policy provided noteworthy updates for exporters operating under the Export Promotion Capital Goods (EPCG) and Prior Authorization schemes. Under the updates, exporters can source inputs and capital goods from international and domestic suppliers without first paying Goods and Services Tax (GST). Instead, they can request a refund later. In addition, commercial exporters can pay a nominal 0.1% GST on local purchases. The review also extended the validity of duty credit vouchers under various schemes such as SEIS and EPCG to 24 months from 18 months and cut the GST rate on their transfers from 12% to zero.
The deemed export program is another important aspect of the country’s foreign trade policy. The scheme applies to goods supplied domestically and paid for in foreign currency or rupees. However, these supplies should earn or save foreign exchange to qualify for special benefits such as tax exemptions and duty rebates. Deemed exports include goods supplied to exporting units, electronic hardware technology parks, software technology parks, biotechnology park enterprises, or goods under tax exemption, tax reduction or exemption, and EPCG plans.
In addition, the deemed export scheme also applies to goods supplied under international competitive bidding to projects funded by multiple multilateral or bilateral agencies. It also includes capital goods supplied to certain power and nuclear projects. Subcontractors of exporters can also benefit from deemed export preferences.
Another important program is the tax rebate program. Under the scheme, import duties and excise duties are exempted on a wide range of raw materials, components, consumables, spare parts and packaging materials required for export production, provided the finished product is exported. These refunds can be obtained monthly. The Central Board of Indirect Taxes and Customs annually publishes and lists products eligible for tax rebates and relevant industry tax rates. Exporters can also request to fix specific branding rates for their products.
In addition, there are tax-free programs such as the pre-authorization program. The scheme allows duty-free import and export of required inputs under pre-acquired permits. Under the plan, the government determines the reasonable amount of input per unit of output. Provide benefits based on self-declaration in the absence of standard input-output specifications. In 2017, in order to simplify the procedure, the mid-term review of foreign trade policy expanded the scope of self-declaration to all Authorized Economic Operators (AEO), that is, trade-related operators such as exporters, importers and agents who have an AEO certificate from the Indian Customs.
Launched in 2017, the Trade-Based Inter-Export Scheme (TIES) is another major initiative. According to the plan, the central government provides assistance to regional and state government agencies to build and upgrade infrastructure projects with important export linkages. The scheme provides grants of up to 50% of the total equity (80% for projects in some states) of each infrastructure project up to a maximum of Rs 20 crore.
There are also special export zone regulations and status that companies that commit to export 100% of their products can take advantage of. Such enterprises can be set up as Export-Oriented Units (EOUs) in Special Economic Zones (SEZs), government-funded Electronic Hardware Technology Parks and Software Technology Parks. All eight existing EPZs have been converted into SEZs. As of the end of October 2022, 424 SEZs have been approved, of which 270 SEZs are operational with a total of 5,620 units.
The government also announced guidelines in 2018 for the establishment of National Industrial Manufacturing Zones (NIMZs), envisioned as integrated industrial towns managed by special purpose agencies and led by government officials. As of the end of October 2022, three NIMZs have received final approval and another 13 have received in-principle approval. In addition, eight districts within the Delhi-Mumbai Industrial Corridor have been designated as NIMZs.
The approved threes are:
- Prakasam NIMZ (Andhra Pradesh): This NIMZ is located in the Prakasam district of Andhra Pradesh. It is spread over an area of 10,000 acres and is expected to attract investments worth Rs. 10,000 crore. The focus industries in this NIMZ are automotive, electronics, textiles, and food processing.
- Sangareddy NIMZ (Telangana): This NIMZ is located in the Sangareddy district of Telangana. It is spread over an area of 10,000 acres and is expected to attract investments worth Rs. 10,000 crore. The focus industries in this NIMZ are automotive, electronics, textiles, and food processing.
- Kalinganagar NIMZ (Odisha): This NIMZ is located in the Jajpur district of Odisha. It is spread over an area of 10,000 acres and is expected to attract investments worth Rs. 10,000 crore. The focus industries in this NIMZ are steel, aluminum, and chemicals.